$8,000 a year in passive income from an $8k ASX 200 investment? Here's how I'd go about it

There's nothing like sitting back and watching that passive income roll in.

| More on:
Smiling woman upside down on a swing with yellow glasses, symbolising passive income.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Earning $8,000 of annual passive income from an $8,000 investment in an S&P/ASX 200 Index (ASX: XJO) dividend stock might sound a bit pie-in-the-sky.

And to get this out upfront, if you're hoping to achieve that kind of return immediately, well, then it most likely is.

Investing isn't a get-rich-quick scheme. Sure, there are a few ASX 200 shares that have more than doubled in value over the past year. But those super higher performers are the exceptions, not the rule.

So, to achieve my $8,000 a year in passive income from my initial $8,000 investment, I'm going to need a little patience. But that's okay. If I stick with it, I'll get there in due time.

Before we get into the details, there are a few other important things to remember.

How many baskets do I need?

'Don't put all your eggs in one basket' may be cliché. But it's also excellent advice for every passive income investor.

We'll look at one ASX 200 share I believe is trading at a long-term bargain below. But a properly diversified income portfolio should contain a larger number (10 is a decent ballpark).

Ideally, these companies will operate in various sectors and across different locations. That will reduce the odds of my income taking a big, unexpected hit if any one company or sector comes under pressure.

Also, bear in mind that the dividend yields you generally see quoted are trailing yields. Future yields may be higher or lower depending on a range of company-specific and macroeconomic factors.

Okay.

Let's dig in.

Targeting $8,000 a year in passive income

The ASX 200 share I'd invest $8,000 in today to build up to an $8,000 annual passive income stream is Woodside Energy Group Ltd (ASX: WDS).

Created with Highcharts 11.4.3Woodside Energy Group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

As you may be aware, Woodside shares have been under pressure over the past year. That's been partly driven by lower oil and gas prices and investor discontent over the company's climate action plan. Woodside has also been spending heavily on growth projects.

But with shares down 30% over the past year, closing on Friday at $24.29, I believe that shares bought at today's prices will earn a much larger yield (more of that handy passive income) than investors buying at potentially higher future prices.

I think the oil price is near its longer-term bottom. And Woodside's growth projects will begin to deliver revenue once they come online. Woodside expects to ship its first LNG cargo from its multi-billion-dollar Scarborough project in 2026. And first oil from its Trion project in Mexico is targeted for 2028.

While I expect the Woodside share price and dividend payouts will rise significantly over the coming years, we won't factor that into our passive income calculations.

At Friday's closing price of $24.29 a share, I could buy 329 Woodside shares for $8,000, with enough change left over for a pint.

Over the past 12 months, Woodside has paid out $1.94 a share in fully franked dividends.

That sees Woodside stock trading at a (rounded) 8.0% trailing dividend yield.

This means I could expect to earn $640 a year in passive income in year one.

Now, this is where some patience comes into play, and it's why it's always a good idea to start investing early in life.

With our conservative assumptions that Woodside shares remain at current levels over the long term with no dividend increases, the power of compounding will turn that 8.0% annual yield on our $8,000 investment into $102,611 in 32 years.

I can then withdraw $8,209 a year in passive income without drawing down on that capital.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

Different Australian dollar notes in the palm of two hands, symbolising dividends.
Dividend Investing

This 5% monthly dividend stock is a cash flow machine

If you want monthly passive income, check out this stock.

Read more »

A woman presenting company news to investors looks back at the camera and smiles.
Dividend Investing

Broker names the best ASX dividend shares to buy now

Let's see why the broker is feeling bullish about these income options.

Read more »

A cute little kid in a suit pulls a shocked face as he talks on his smartphone.
Dividend Investing

Up 38% in a year, is it too late to buy Telstra shares for the dividends?

A leading expert gives his verdict on Telstra’s passive income appeal following the stock's 38% 12-month share price gains.

Read more »

A young woman dressed in street clothes leaps happily in the air with the focus on her bright red boots that are front and centre for the camera.
Dividend Investing

This ASX dividend share is projected to pay a 10% yield by 2028

Analysts are expecting big payouts from this business.

Read more »

A couple sits in their lounge room with a large piggy bank on the coffee table. They smile while the male partner feeds some money into the slot while the female partner looks on with an iPad style device in her hands as though they are budgeting.
Dividend Investing

Want to turn $20K into a $1K second income? Here's how

ASX shares can pay you upfront for buying them...

Read more »

A man and woman sit next to each other looking at each other and feeling excited and surprised after reading good news about their shares on a laptop.
Dividend Investing

2 ASX dividend shares I think are great value today

These two stocks offer a lot of what I’m looking for.

Read more »

Excited couple celebrating success while looking at smartphone.
Dividend Investing

Buy Woodside and these ASX dividend stocks

Brokers have put buy ratings on these dividend payers.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
Bank Shares

Macquarie share price higher amid DRP dividend news

Macquarie has announced the share price of stock to be allocated through its dividend reinvestment plan.

Read more »